Market Report: Why the Nat Gas Rally?

The phones were ringing off the hook. What is going on in natural gas? Why is natural gas going up? How can natural gas dare rally when the amount of working gas in storage is 17.4% above the five year average and on target to end the refill season at an all time high? Well in short, the easy answer is that it was just too cheap. Not the answer perhaps you were looking for but perhaps it is the most accurate one. Especially for the month of September which I have pointed out is very strong from a seasonal viewpoint. I guess it is hard to fight your seasonal nature sometimes. But despite being just too cheap and a seasonal bottom, for those who want more there were other stories that helped add to the explosive bullish momentum.

One reason that some people might have gotten long natural gas was because the United States Natural Gas Fund UNG announced on Friday that it would be issuing new shares later this month. Many people believe that funds like UNG increase the price of the underlying commodity. So that belief caused some people to buy the underlying futures contract perhaps in anticipation of the hedging of these new shares. Recently UNG was trading at a huge premium to the spot futures price as a shortage of shares made them more valuable. UNG fund management warned as reported by Reuters that it cannot predict what impact, if any, the resumption of creation activity will have on the price of the units of the fund but warned it was possible it could reduce or remove any premium over net asset value. But we may have already seen the psychological effect that it could have on futures, especially at a time when the market had a seasonal tendency to bottom anyway.

Yet some people where buying in what might be a kind of a roundabout way in the opposite reason. It could be that some short trading funds were cover positions because they were over the position limits. A lot of traders talk centered around the fact that the regulators are going after speculators and a story about the CME group memo and a “pledge” to enforce existing position limits and possibly fine violators. This, as the story goes, caused some short trading funds to exit positions because they were either close to or already over the limit. If true, of course the rally in gas would have the opposite effect than regulators had in mind because this might be an example of position limits actually adding to the price. The CME group said that they are already enforcing rules on position limits and that the memo, according to Reuters News, that the advisory notice, sent to traders and brokers late Friday, is not likely to change how trading is carried out on exchanges, but is designed to "unify" the rulebooks at various CME-controlled exchanges.

Now we go on to news that use to move the oil market. You remember the in the good old days; before the Lehman collapse. Over night Pakistan thwarted an attack on an oil facility. This story is a reminder that one of Al Qaeda's stated goals is to attack an oil facility. No word on whether it was an al Qaeda attack but after the release of a bin Laden tape it is a strong possibility. Better keep our terror guard up.

Those Nigerian rebels are at it again. Bloomberg News reported that, “ The Movement for the Emancipation of the Niger Delta, the main armed group fighting in Nigeria’s southern oil region, said it will end its 60-day cease-fire tomorrow, spokesman Jomo Gbomo said in an e-mailed statement today." That means of course that Nigerian oil facilities may start blowing up again.

Russia is warning that the Ukraine cannot afford its natural gas bill, raising concerns about another crisis this winter. If you remember the crisis a year ago helped turn the trend around in petroleum.

Can Iran talks about its nuclear program reduce the risk premium in oil and gold? The US is leading UN talks along with other UN security permanent council members China, Russia, France, and Britain. Germany will also be part of the talks to try to convince Iran to stop its pursuit of a nuclear weapon. The Iran situation has long been a risk priced in to the marketplace. Last week there were a lot of rumors floating around about Iran and some say that was another reason that traders bought gold as a safe haven play. The impact on oil was less due to large inventories and spare production capacity. The same reason that oil has ignored Nigeria and the Pakistani terror threats. Some say the Iranians are only trying to buy time and perhaps prepare to defend itself from a surprise attack on its nuclear facilities from a country like maybe, I don’t know, perhaps Israel. Still the talks may offer some hope that a military conflict with Iran may be avoided. It may be a false hope but a hope nonetheless.


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